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Your Human Capital

When I post my financial reports each month, they reflect only a small piece of who I am as a person. My bank account balances are only a small part of my life although they are center stage on shizennougyou. I try to avoid labels for this reason; when I reach a net worth of a million dollars, I will be hesitant to call myself a “millionaire,” a label that would describe only a small part of me.

Even when looking at my finances in whole, net worth is a small piece. You cannot forget about your net income, a number which will tell you more about your financial well being than your net worth. That is, if your net income is positive every month and your net worth is negative, you’re in better financial shape than if your net worth is positive and your net income is negative.

You can take your net worth, income, and cash flow and still have an incomplete picture of your financial wellbeing. That’s because these figures all neglect to include human capital, your ability to earn income in the future, and focus solely on financial capital, your assets.

The New York Times recently shared an article about using human capital to hedge your financial capital. If you have strong human capital, you can afford to take fewer risks with your financial capital, but if your human capital is weaker, you may need to take more financial risks to get to the same place.

The strength of human capital can be judged by the stability of your job and your ability to find work regardless of the economy. Can your skills be marketed across a variety of industries? If you are a mortgage broker, your immediate job security is tied to the real estate industry. That could be a dangerous sign for your human capital. But if you are a financial analyst, you might be able to find a job in any economy in any industry (not just finance).

If you are close to retirement, your human capital will be low. You may not be willing to spend several years training for a new job or career. Young people have a human capital advantage; time is on their side.

This measurement of human capital may be even more important and tell a more complete story about your ability to thrive financially than your financial capital. How would you characterize your human capital?

Published or updated March 9, 2010.

About the author

Luke Landes is the founder of shizennougyou. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 5 comments… read them below or add one }

avatar 1 Anonymous

One’s ability to earn is simply the greatest asset out there.

Get your earnings power, divided it by a risk free rate i.e. 4% (0.04), to attain the present value of what you are worth now in today’s dollars. Earn $200,000 a year, your human capital value is $8 million roughly.

We’re much wealthier than we think!

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avatar 2 Luke Landes

Don’t forget that many people will earn more over time, and different occupations have different growth potentials, so that should be factored in. Also, people in careers deemed “recession-proof” will have a human capital advantage. And I also believe that a varied education and an ability to adapt and learn (strong cognitive capabilities) increase this value.

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avatar 3 Anonymous

Great point! For me, human capital will still depend on your chosen industry – whether you are providing services or goods. When you render services, it’s your self that makes a product. This case, you need to assure that your self is always sharpened for any output it produced. When you sell goods, you are more concentrated with capitalism (as slightly different from professionalism). But whatever industry you are – you still need to ensure that quality is always preserved.

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avatar 4 Anonymous

OMG I’m bankrupt ;-) I’m going to have to find a way to move my “Human Capital” off-balance-sheet. I don’t want to sound like I’m bragging but my retirement plan is working and I’m not. Although that sounds like a zero balance of Human Capital my desire to go back into the workforce drives it way negative. Great point about the income statement as it’s the only true measure of successful financial efforts. Positive cash flow should ensure balance sheet growth. I enjoy this site and often use many of your and other contributor’s comments and explanation when talking to my kids and grandkids about finance – it oftentimes sounds less “parental”. I also enjoy reading about your successes.

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avatar 5 Anonymous

Good subject — one that’s near and dear to my heart! I actually just finished a post about income and self-worth, which is sort of a tangent but, I believe, still firmly related to this. This society puts so much emphasis on what you do/what you earn and who you are as a person. It can be hard for those who are out of work or, like me, disabled to really figure out our identities.

That said, I do agree that earning power is crucial — both for financial security and for a sense of self. It can be so terrifying to look into a future where you make no money. You feel helpless. That’s why so many people nearing retirement are frightened beyond belief. They don’t know how long they can keep working — but they know they definitely can’t *stop* working either.

Knowing that you can go out and earn more money is the single greatest asset we humans have. Or so I believe, anyway.

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